Expect Platinum to Break Out Like Silver

 |  Includes: PGM, PLTM, PPLT, PTD, PTM
by: Nicholas Pardini

Of all the precious metals platinum is the most undervalued. With the current rally of silver, it has closed it closed it ratio with gold from 55:1 to a 34:1. Platinum on the other hand is still trading very cheaply to gold at 1.19. The previous ten year average for the platinum has been 1.95. This disparity will revert to the mean. Similar to the recent move in silver, I expect this ratio to be corrected by a rise in platinum instead of a decline in gold prices.

Fear is what currently holds platinum's price down. It took the 2008 financial crisis to bring down platinum to its record lows versus gold prices and has been slowly recovering since. Platinum is perceived to be more of an industrial metal compared to the other precious metals: gold and silver. As a result, its price has been correlated to the movement of other industrial metals and commodities instead of with gold. The historical use of gold and silver standards to back up currencies, has inflated market sentiment towards these metals. Platinum, on the other hand, has been over looked and compared to the likes of copper and palladium.

However, its industrial uses are a plus not a minus for platinum. First, it is incredibly more rare than gold or silver. The world's platinum production only amounts to six percent of the world's gold production or one percent of the world's silver production. Unlike gold with 88% of current reserves are used for jewelry or investment, platinum's usage is 76% industrial. Due to industrial uses in automobile manufacturing, platinum does not have a large above ground stock available to sell like gold (easier to sell jewelry than rip exhaust pipe out of your car). Emerging markets have been more than able to replace the declining demand of automobiles by Americans, so platinum demand will rise with this shift in production. Another bonus about platinum is that the vast majority of its supply is found in mines in South Africa and Russia, which have more geopolitical risk than gold and silver which have plenty of mines in more stable countries.

Overall, platinum is trading at incredibly cheap levels versus gold historically. Since, I do not expect gold to significantly decline in price over the next few years, platinum will correct its low ratio to gold by rising in price. My target for platinum is $3,000 per ounce and possibly higher. Gold would only need to rise $40 per ounce over the same time period for platinum to reach those levels and maintain its historical ratio. The rarity and the more consistent industrial based demand of platinum will trigger a rally in the metal and market sentiment will eventually follow. This strategy is more of a long term investment, as it may take a few years for platinum to rise up that far from its current level at $1,778 per ounce and break its price ties to the industrial metals.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PPLT over the next 72 hours. I am also long GLD.